Progressive shares look appealing because they trade at a historically low valuation, just as the company's revenue and profits are poised to expand for the first time in several years.

Now around 16, Progressive (PGR) trades at 11 times projected 2009 profit of $1.47 a share. Wall Street's 2010 consensus estimate is $1.45. Yet bulls, like Goldman Sachs analyst Chris Neczypor, see it nearer $1.60 -- which would mean the company is fetching a reasonable 10 times next year's profit, compared with its historic price/earnings ratio of 14. The stock commands two times book value -- rich, compared with most peers -- but near its low of the past 15 years and under its historic average of three.

In September, Neczypor raised Progressive's rating to Buy from Sell, with a price target of 21, saying it "should benefit from both rate and volume increases" as cost-conscious drivers switch to low-cost direct coverage sold without agents, a market led by Geico and Progressive.

Revenue, which has been flat to down in recent years, was up a modest 1% in the third quarter, and could rise into the mid-single digits in 2010. That would boost profit, and lift return on equity to 20% -- nearly double the auto-insurance industry's average. One longtime holder of the stock argues earnings could top $2 in 2012, resulting in a price in the mid- to high 20s. Progressive fell as low as 10 earlier this year, after reporting a rare loss for 2008, stemming from investment setbacks.

Starting in 2003, auto insurers enjoyed high profitability, which led to price reductions that have eroded earnings and could produce an industrywide underwriting loss this year, Fitch Ratings maintains. Progressive, however, is solidly in the black, with an underwriting profit margin this year 2009 of 8%, or 92 based on what the industry calls a combined ratio, which measures claim payments and other expenses as a percentage of premiums. Progressive has benefited from a bottoming in auto-insurance rates over the past year.

Progressive's $14 billion investment portfolio is 45% in cash equivalents and Treasuries, with stocks making up just 3%. If the company were more aggressive with its asset mix, investment income would rise.

As one of the top companies in a fragmented industry, Progressive has an excellent chance to gain more market share. "I see Geico and Progressive as the Coke and Pepsi of the auto-insurance industry," says Glenn Renwick, Progressive's CEO. "I think we have a long runway in front of us."

Geico's market share now is about 8%, while Progressive's is 7%. Both trail State Farm (18%) and Allstate (10%). Roughly 58% of Progressive's sales come through agents, with the rest sold directly. Geico is 100% direct. Direct sales account for 20% of the market, with Geico, USAA and Progressive at the top. USAA targets military families, and doesn't broadly market its policies.

POLICIES SOLD DIRECTLY are gaining in popularity because they're often cheaper. And younger drivers are more inclined to buy policies over the phone or Internet and don't view an agent as a necessity.

"Progressive, along with Geico, is one of the few long-term winners in the personal-lines insurance industry," says Ken Charles Feinberg, a co-portfolio manager of the Davis New York Venture Fund. Feinberg calls Progressive a "disciplined underwriter" with "best-in-class systems" and says the shares are "a very compelling long-term investment." The Davis funds are large Progressive shareholders.

Progressive uses what is arguably the industry's most sophisticated computer models to price its policies. It also has low expenses and a reputation for quickly and fairly settling accident claims.

In the direct-sales game, branding is crucial, as Geico's gecko and cavemen TV commercials have shown. The Berkshire unit spends more than $600 million annually on advertising. Progressive is countering its archrival well, with commercials using a cute, perky actress and comedienne known as Flo (real name: Stephanie Courtney) who wears bright red lipstick and touts Progressive's ability to quickly compare its rates with those of rivals. Progressive may spend $400 million this year on ads and marketing.

Long an innovator, Progressive has rolled out such programs as a "concierge" service, whereby drivers who get into accidents can drop off their cars at 54 central locations in major metropolitan areas and let Progressive handle the repairs, while getting a rental car on the spot.

The Bottom Line

Based on its price-earnings and price-to-book-value multiples, Progressive looks undervalued. The shares could jump by at least 25% over the next year.

One of its newer programs, called MyRate, uses in-car satellite transponders to base insurance rates on individual driving patterns, including miles driven, speed and the time of day -- with rush-hour and late-night driving costing more than mid-day trips. Potential customers can also tell Progressive what they want to pay for insurance -- say $1,000 a year -- and then get a policy tailored to their budget.